Question

Capital Co. has a capital structure, based on current market values, that consists of 37 percent debt, 11 percent preferred stock, and 52 percent common stock. If the returns required by investors are 12 percent, 13 percent, and 15 percent for the debt, preferred stock, and common stock, respectively, what is Capital’s after-tax WACC? Assume that the firm’s marginal tax rate is 40 percent. (Round intermediate calculations to 4 decimal places, e.g. 1.2514 and final answer to 2 decimal places, e.g. 15.25%.)

After tax WACC

%

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Answer 1

The After tax Weighted Average Cost of capital =Cost of debt *%of debt*(1-tax rate)+%of equity*cost of equity+%of preferred stock*Cost of preferred stock

The After Tax cost of debt =Interest *(1-tax rate)

Here the Interest =12%

Tax Rate =40%

So after tax cost of debt=.12*(1-.40)

.12*.6=7..072 that's 7.20%

The Cost of preferred stock =13% the cost of common stock =15%

The % of debt =37% %of preferred stock=11% % of common stock =52%

So After Tax WACC=.37*.072+.11*.13+.52*.15 =.02664+.0143+.078 That's 11.894% That's 11.89%